'Philanthropists play critical role in attracting impact capital'

There is a very strong recognition in the firm is that 'India's time is now', says Kudva

India has emerged a global hotspot for impact investment, attracting $4.1 billion since 2010 in sectors such as financial inclusion, agribusiness, health care, education and clean energy, says a recent research by consultancy major McKinsey. The study, instituted by industry body Impact Investors Council, suggests this type of investing in India has the potential to grow from $1billion in 2015 to $6-8 billion by 2025. Roopa Kudva, partner at Omidyar Network and managing director of Omidyar Network India Advisors, a key player in the impact investment space, tells Sudipto Dey that attracting domestic capital is the next big challenge for growth. Edited excerpts:

 

How positive are you of India reaching the $8 billion target by 2025?

There are two sides to this — the supply side and the demand side. On the supply side, the key issue is capital for impact investment.  The role of philanthropy in making capital available to this space is critical. Impact investing happens at various stages, from growth-stage companies to down the line to early-stage ones. Early-stage plus impact is a very good recipe for philanthropists. Philanthropists are mostly the people who have made their money through entrepreneurship. They understand value of entrepreneurship, have high risk-taking capability, and are altruistic, looking at giving it back to society.  

There is a journey a philanthropist takes from being an entrepreneur to an impact investor. Stage zero is when they are out to build their business. Stage one is when they look at giving back the money for the good of humanity. This starts off with a lot of transactional giving — give money to different charities, but there is nothing strategic about it. The phase after that is what I loosely refer to as strategic giving. This involves thinking about the causes they are more passionate about and the sub-themes they would like to support. The final stage is deploying the philanthropic money to for-profit enterprises that also have massive social impact.

If we are to achieve the goal of reaching the $8 billion target by 2025, philanthropists have to play a catalysing role in attracting capital in this space. However, these are hard-nosed investors, who look at the data for financial returns and the social returns. They will look at the common matrix for measuring social returns.  Discussions around returns have to get more nuanced if this sector has to attract more capital.

On the demand side, the absorptive capacity of impact sectors is very high.

What key measures are needed — by industry and the government — to attract the estimated pool of $6-8 billion of philanthropy capital into impact investment?

First, there is an education journey. Impact industry players need to talk to philanthropists and educate them of what they can do. From the regulatory side, trusts are not allowed to invest in equity. That comes as a big hurdle for impact investing. The law does not allow trusts to do equity investments in for-profit enterprises.  We need to work with the government to enable equity investments in for-profit enterprises subject to certain conditions. For instance, the gains could be re-invested and not taken out. In fact, the Impact Investors Council believes that the sector does not need any tax incentives. 

Omidyar has invested around $200 in India out of its $1 billion global impact fund. Are you looking at raising funds from domestic sources?

We are very fortunate to be in a position where we don’t have to raise money, and all our funding is provided by Pierre Omidyar. There is a very strong recognition in the firm is that ‘India’s time is now’. We did say around a year back that by 2020, we hope to be $350-400 million range. This includes both equity and grant investments in India.

We have invested in all the five sectors in India that Omidyar works in – emerging technologies, financial inclusion, education, governance & citizen engagement, and property rights. We have also build connections with all the players in the ecosystem.  

Will there be efforts to tap domestic philanthropists?

One of the things that will be very important for this industry will be to tap domestic pools of capital. The domestic pool of capital will become very important in certain sectors such as property rights, governance and citizen engagements, which includes independent media as well. It becomes very important for funding in this sectors to be not hundred per cent foreign owned. Deepening the co-investor pool that is of Indian origin will be very important.  Currently, the bulk of the $4.1 billion of impact investment that has come to India over the last five years is of foreign origin. Encouraging Indian capital or helping domestic philanthropists enter the impact investment space is something we will increasingly work on.